Insert Presentation Title Here Manufacturing Webinar Series

May 16, 2013

In Alliance with Rehmann

WebEx Introduction

Moving around

• Lines may be muted upon

entry.

• Should the audio

disconnect, view the event

info tab.

• If you connected via phone:

We will unmute the lines for

questions at the end.

CPE

• In order to receive CPE you

must remain connected

throughout the webinar and

participate in the polling

questions and evaluation.

We value your opinion

• An evaluation survey will

pop up in separate window

upon closing out of the

webinar.

Technical difficulties

• Please contact

holly.shier@rehmann.com

or call WebEx at:

866.229.3239 or

1.408.435.7088 for

international assistance.

To ask a question,

use the chat box

and choose “all

panelists” or

use the Q&A

if available.

This

session

may be

recorded.

If voice and video

are not synced,

click “View” and

“Sync Display.”

.

Daniel Vanderberg, CPA, Principal

Executive Summary Dan is Rehmann’s Director of International Tax and the Managing Principal of the Grand Rapids Tax Department. He is based in our Grand Rapids office. Dan has more than 20 years of diverse tax and business experience in public accounting and private industry. He has assisted clients with U.S. and international business acquisitions, including tax due diligence, and he has advised on international tax matters related to both inbound and outbound activities. Dan has helped clients with major business restructurings in the U.S., Europe, and Canada. He has FAS 109/FIN 48 experience with large publicly traded companies and with private companies. Prior to joining Rehmann, Dan was with several global accounting firms. His previous experience includes serving as the West Michigan International Tax Practice Leader for a Big Four firm. He was also the Tax Manager and Assistant Treasurer at a multi-national manufacturing company, and the CFO of a VOIP telephony firm.

Manufacturing

Webinar Series

May 16, 2013

Interest Charge

Domestic International Sales

Corporations

Do you want to receive CPE?

1. Yes, please

2. No, thank you

5

Polling Question #1

Why implement an IC-DISC structure?

• The IC-DISC regime is the last remaining export tax incentive

• U.S. exporters can reduce their U.S. effective tax rate with an IC-DISC

• There are both temporary and permanent tax benefits available to the U.S. exporter under the IC-DISC regime

6

Going Global Over Time

Domestic

Operation Only

Separate

Foreign Entity

Foreign

Branch or

Partnership

License to

Foreign

Person

Export

Current U.S. Taxation Potential Deferral

Time

8

History of Export Assistance

• 1954 – Western Hemisphere Trade Corp.

• 1971 – Domestic International Sales Corp.

(DISC) Allowed Exporters to accumulate DISC

income without paying taxes until distributed

• 1984 – DISC ruled an illegal export subsidy

• 1984 – Foreign Sales Corp. (FSC)/ Interest

Charge DISC (IC-DISC) FSC income granted

partial exemption from U.S. Taxation; IC-DISC

can accumulate income, but must pay interest

charge

History of Export Assistance

• 1999 - FSC ruled an illegal export subsidy

• 2000 - ETI/ FSC Replacement Law enacted ETI allows exporters to exclude a portion of profits from export income

• 2001 - WTO Rules ETI an illegal export subsidy

• October 2004 - ETI Repeal and Replacement (Domestic Manufacturing Deduction)

9

IC-DISC / Domestic Manufacturing

Deduction Compatibility

• The Domestic Manufacturing Deduction under Sec. 199, in effect, reduces the marginal tax rate on applicable taxable income by 3% (for example, a marginal income tax rate of 35% would be reduced to 32%).

• The Domestic Manufacturing Deduction is not contingent upon exports, whereas the IC-DISC benefit is contingent upon exports

• The Domestic Manufacturing Deduction and the IC-DISC benefit are not mutually exclusive . . . both tax benefits can be claimed, although the IC-DISC commission presumably reduces Qualified Production Activity Income for purposes of computing the Domestic Manufacturing Deduction

10

Shareholder Direct-Owned IC-DISC

IC-DISC

Shareholder

U.S. C Corp

with export sales

Commission

Payment

“Services”

Dividend

Foreign

Customer

$$$

$$$

11

IC-DISC owned by Flow-Through Shareholder /

Member / Partner

S Corp / LLC /

Partnership

with export sales

IC-DISC

Distributions

Dividend $$$

$$$

$$$

Commission Payment for

“services” 12

What is an IC-DISC?

• Domestic Corporation

• $2,500 Capital

• Single Class of Stock

• Files Timely Election to be treated as an IC-DISC

• Maintains separate books and records

• Has its own bank account

• Meets the 95% qualified export asset & 95% qualified gross receipts tests

• Interest charge on deferred income

• Deemed distribution of commission income pertaining to export gross receipts > $10 million

13

Qualified Export Property

• Property manufactured, produced, grown, or

extracted in the U.S. by a person other than an IC-

DISC

• Held primarily for sale, lease, or rental for direct

use, consumption or disposition outside the U.S.

• Up to 50% of the fair market value (determined by

ultimate selling price) of the export property can

be foreign content

14

Manufactured in the U.S. if -

• There is a substantial transformation in the U.S., or

• The operations in the U.S. are generally considered

to constitute manufacturing, or

• Conversion costs incurred the U.S. constitute 20% of

the COGS

– Packaging and assembly count as a cost in this test

15

Qualified Export Assets

• Export Property

• IC-DISC receivables

• Temporary investments

• Producer’s loans

• Stock or securities of a related foreign export

corporation

• Export-Import Bank obligation, etc.

• Funds awaiting investment

16

Qualified Export Receipts

• Receipts from sales, leases, or rental of export

property

• Use and Destination tests

• Sales to a U.S. distributor can count if property is

exported within one year and the property is not subject

to any use or additional manufacturing during that time

• Services related and subsidiary to sales/leases of

export property

• Engineering/architectural services for construction

projects located outside the U.S.

17

Engineering and Architectural Services –

IC-DISC

• Export sales in the IC-DISC scenario can also consist of certain

engineering and architectural services for construction projects

located (or proposed for location) outside the U.S.

• These services include feasibility studies, and design, engineering

and construction supervision

• Receipts from these services are qualified export receipts whether

or not they are related and subsidiary to the sale of export property

• Although the project must be located (or proposed for location)

outside the U.S., there is no requirement that the engineering or

architectural services be performed outside the U.S.

18

Engineering and Architectural Services -

Domestic Manufacturing Deduction

• The domestic manufacturing deduction is applicable to

certain engineering and architectural services. Engineering

and architectural services are eligible for the Sec. 199

deduction, but only if they are performed in the U.S. for real

property construction projects in the U.S.

• Eligible engineering services include consultation,

investigation, evaluation, planning, design, and supervision

of construction. Eligible architectural services include

consultation, planning, aesthetic and structural design, and

supervision of construction.

19

How is an IC-DISC taxed?

• An IC-DISC is exempt from all forms of federal taxation*

• The shareholders of an IC-DISC are taxed on paid dividends or deemed-paid dividends

• The related supplier (i.e. exporter) gets a deduction for the IC-DISC commission paid or accrued

• An interest charge may apply to the shareholders if the IC-DISC reports accumulated IC-DISC income in consecutive years

*Some states tax an IC-DISC as a C corporation – there is currently uncertainty in Michigan.

20

How is the IC-DISC Commission

Calculated?

• Generally the IC-DISC commission is calculated as the greater of:

– 4% of qualified export receipts (not to exceed the profit on the export transactions), or

– 50% of the profit on the export transactions.

• The commission cannot exceed the combined taxable income (profit) on the export transaction except to recoup the IC-DISC's direct export expenses.

• Loss sales can be excluded from the calculation

21

IC-DISC Simplified Commission

Calculation and Tax Benefit

Scenario 1 Scenario 2

Sales (FTGR) $2,000,000 $2,000,000

COGS $1,500,000 $1.525,000

SG&A $ 300,000 $ 325,000

Export profit (CTI) $ 200,000 $ 150,000

50% of profit $ 100,000 $ 75,000

4% of FTGR $ 80,000 $ 80,000

Commission / Dividend $ 100,000 $ 80,000

C corp structure tax benefit is the deductible dividend.

Flow-through structure tax benefit is the tax rate arbitrage (difference between ordinary income tax rate and qualified

dividend tax rate) on the re-characterized income.

22

Expense Allocation and Apportionment

• Combined Taxable Income (CTI) is influenced by expense

allocation and apportionment methodologies of various direct

and indirect expenses. Expenses attributable to CTI may be

minimized by:

– Performing a functional analysis to determine how expenses

are generated and subsequently recorded

– Identifying factual relationships which permit minimum

allocation of expenses to export activity

• Certain expense categories have special methods for

allocation between domestic and foreign (i.e., R&D, interest,

state income tax)

23

Grouping Options

• Single grouping

• Product

• Product Line based on industry or two digit SIC

codes

• Transaction (a line item on an invoice)

24

Marginal Costing

• Beneficial when export sales within a grouping are

less profitable than domestic sales within that

grouping

• Can be applied selectively where beneficial on

individual grouping (Sch. P) basis

25

DISC Compliance

• Record keeping requirement

• Commission agreement

• Minimum par/stated value capital: $2,500 every day of tax

year

• The DISC tax return is due on the 15th day of the 9th month

after its tax year ends.

– 1120-IC-DISC

– Schedule P: Intercompany commission

– Schedule K: shareholder statement of DISC distributions

26

Implementation

• Identify qualifying export transactions

• Consider how IC-DISC could work in structure

• Determine IC-DISC ownership and tax impact

• Refine tax benefit analysis

• Form C-corporation

• IC-DISC election, commission agreement, and

compliance with DISC rules. It is advisable to consult a tax advisor and an attorney to assist with

forming the IC-DISC structure.

27

Questions?

Dan Vanderberg

Principal, Director of International Tax

dan.vanderberg@rehmann.com

Insert Presentation Title Here Cyber Crooks are Stalking

Your Business Protecting your information in a world with no

boundaries!

Copyright 2013 N1 Discovery, LLC. All Rights Reserved.

In Alliance with Rehmann

Manufacturing Webinar May 16, 2013

Scott A. Bailey, CISM

Executive Summary Scott is a partner with N1 Discovery and has over 28 years of experience in digital forensics, eDiscovery and IT security and risk management. He is nationally recognized and specializes in sophisticated and complex technology investigations. He has consulted for Fortune 500 companies and major financial institutions on data breaches, incident response, IT security controls, data encryption, IT strategic planning and policy development. He has assisted companies regarding compliance with data security standards such as Sarbanes-Oxley, Gramm-Leach Bliley Act and PCI. Scott is a subject matter expert in digital forensics and eDiscovery, and has worked with corporations, law firms and law enforcement agencies on a variety of civil and criminal cases. Scott has provided expert witness testimony in several legal cases in both Federal and State courts.

Disclaimer

This presentation is for informational purposes only.

The information contained herein should not be

considered or relied upon as technical, security,

financial, or legal advice.

Polling Question #2

What is Triskaidekaphobia?

a) Fear of new ideas

b) Fear of the number 13

c) Fear of Triscuit crackers

Challenges

• Protecting data in motion, at rest… everywhere!

• Disposal of electronic confidential information when

no longer needed.

• Mobile devices and BYOD. Employees demanding

to use there personal devices for work.

• Passwords, passwords and more passwords.

• Human behavior, the weak link in security.

• Speed of technology, business and life.

Facts & Statistics

Facts & Statistics

• 57,000+ fake web addresses are created each week (Guardian)

• 22% of Google searches lead to malicious links (Websense)

• 10% of Facebook posts with links are malicious (Websense)

• PayPal is the #1 target for Phishers and Facebook

is #2 (Kaspersky Labs)

• 780 new malicious Internet Banking programs every

day (Kaspersky Labs)

Facts & Statistics (continued)

• By the end of 2013, there will be more mobile

devices on Earth than people (Cisco, 2013)

• 4 out of 5 consumers use a smartphone to shop

(comStore, 2012)

• By 2014, mobile Internet is predicted to take over

desktop Internet usage (Microsoft Tag, 2012)

• Nearly 50% of shoppers believe they are better

informed than store associates (Motorola, 2013)

Data Breach History

Source: ID Theft Resource Center

Category 2013 (as of 2/5/13)

2012 2011

Banking/Credit/Financial 0 17 (3.8%)

470,048 28 (6.7%)

413,348

Business 12 (24%)

5,083 165 (36.9%)

4,615,893 198 (47.3%)

7,917,907

Educational 7 (14%)

4,680 61 (13.6%)

2,304,663 59 (14.1%)

818,458

Government/Military 9 (18%)

111,275 50 (11.2%)

7,688,707 48 (11.5%)

10,036,657

Medical/Healthcare 22 (44%)

127,465 154 (34.5%)

2,237,873 86 (20.5%)

3,732,071

Easy Money!!

Zeus Trojan • Criminal can configure virus to steal only the information

they are interested in.

• Most commonly used to steal Internet banking credentials and then all your money.

• First identified in July 2007

• In October 2009 over 1.5 million phishing messages were sent on Facebook to spread the Trojan

• In May 2011 the source code was leaked and in October an even more robust variant hit the Internet

• It controls computers in over 196 countries

• In 2012 a new variant was detected that infects Blackberry and Android devices

Michigan Incidents • Insurance company, $870K

• Bank, $5 million

• Oil company, $750K

• Manufacturer, $1.7 million

• General contractor, $30K

• Cleaning company, $178K

• Manufacturer, $550K

• Church, $130K

• Local Government, $170K

• Transportation company, $200K

Source: FBI

Recommendations

• Ensure your anti-virus and anti-malware is up-to-

date.

• Ensure your anti-virus and anti-malware definitions

are up-to-date.

• Provide security awareness training to your

employees.

• Setup a separate computer that has been secured

and only used to conduct your Internet banking

business.

Polling Question #3

Do you allow your employees to connect their personal

mobile device to the company network and store

company data on the device (including company

email)?

BYOD Primer…

Mobile Facts & Statistics • 1 out of 4 people in the US no longer use a computer,

they use a mobile device.

• Apple sold 5 million iPhone 5’s in first three days. (Apple)

• Apple has sold over 125 million iPhones and over 58

million iPads world-wide. (c|net)

• 14,923 new smartphone malware programs detected

between April and June 2012. (Kaspersky Labs)

• 55% of cellphone users use their phone to go online. (Pew)

Polling Question #4

What percentage of Americans take their cell phone

with them to the bathroom?

a) 35%

b) 55%

c) 75%

Questions

• What type of devices are you going to support?

• What responsibility does your IT department have to

provide technical support?

• What happens to the device when your employee

decides to upgrade?

Recommendations • Don’t ignore it.

• BYOD policies that clearly outline a user’s responsibilities. Be sure they opt-in.

• Determine which employees need BYOD.

• Classify your data to ensure sensitive data is not accessible from or on a mobile device.

• Enforce security requirements on devices.

• Invest in mobility management software.

• Don’t assume your IT department has mobile device security under control.

More threats? Are you kidding…

2013 Trends / Predictions

• Hacking as a service.

• Ransomware (data encryption-extortion).

• Smartphone kidnapping.

• Increase in social engineering attacks.

• Increase in music and movies to install malware.

• Hackers will continue to use and abuse cloud

services.

• Mobile threats and more mobile threats.

Watch for these topics in future webinars!

Thank You!

Scott A. Bailey, CISM

248.498.4130 (office)

248.431.3387 (cell)

scott.bailey@n1discovery.com

In Alliance with Rehmann

Next webinar: June 19, 2013

Cost Segregation: Antidote to Tax Increases

and

State and Local Taxation and You

To register, go to:

Rehmann.com/industries/manufacturing